-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sk+WBQmG0YibwFqR4OuaXXMRKmZB616iqzENskls50Lig4yBXnY6UOlgV8sDNGQd x7AzLqPaYn1H+WHNOxI+sQ== /in/edgar/work/0000913293-00-000065/0000913293-00-000065.txt : 20001116 0000913293-00-000065.hdr.sgml : 20001116 ACCESSION NUMBER: 0000913293-00-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE SEMICONDUCTOR CORP /DE/ CENTRAL INDEX KEY: 0000913293 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 770057842 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22594 FILM NUMBER: 768538 BUSINESS ADDRESS: STREET 1: 3099 N FIRST ST CITY: SAN JOSE STATE: CA ZIP: 95134-2006 BUSINESS PHONE: 4083834900 MAIL ADDRESS: STREET 1: 3099 N FIRST ST CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 0001.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q (MARK ONE) [x] Quarterly report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the quarterly period ended SEPTEMBER 30, 2000, or [ ] Transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the transition period from __________ to __________. Commission file number: 0-22594 ALLIANCE SEMICONDUCTOR CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0057842 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) NUMBER) 2575 AUGUSTINE DRIVE SANTA CLARA, CALIFORNIA 95054-2914 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Registrant's telephone number, including area code is (408) 855-4900 ------------------- Securities registered pursuant to Section 12(b) of the Act:NONE Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH ------------------- ------------------------------ Common Stock, par value $0.01 REGISTERED NASDAQ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of November 10, 2000, there were 41,288,116 shares of Registrant's Common Stock outstanding. -1- ALLIANCE SEMICONDUCTOR CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX PAGE PART I FINANCIAL INFORMATION Item 1 Financial Statements: Condensed unaudited Consolidated Balance Sheets as of September 30, 2000 and March 31, 2000.................................3 Condensed unaudited Consolidated Statements of Operations for the three and six months ended September 30, 2000 and 1999................4 Condensed unaudited Consolidated Statements of Cash Flows for the six months ended September 30, 2000 and 1999..........................5 Notes to unaudited Condensed Consolidated Financial Statements........6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................14 PART II OTHER INFORMATION Item 1 Legal Proceedings....................................................22 Item 2 Other Information....................................................22 Item 3 Submission of Matters to a Vote of Security Holders..................25 Item 4 Exhibits and Reports on Form 8-K.....................................25 SIGNATURES...................................................................26
-2- =============================================================================== Part I - Financial Information ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
ALLIANCE SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) September 30, March 31, 2000 2000 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $17,494 $34,770 Restricted cash 2,782 2,804 Short term investments 584,299 883,300 Accounts receivable, net 33,708 15,858 Inventory 77,752 37,439 Related party receivables 2,650 1,778 Other current assets 1,866 1,958 ----------- ----------- Total current assets 720,551 977,907 Property and equipment, net 10,665 9,990 Investment in United Microelectronics 505,478 505,478 Corp. (excluding short term portion) Alliance Ventures and other investments 62,773 26,646 Other assets 315 421 ----------- ----------- Total assets $1,520,442 $1,299,782 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short term borrowings $10,000 $- Accounts payable 51,780 27,133 Accrued liabilities 6,589 10,388 Income taxes payable 6,058 6,641 Deferred income taxes 199,044 316,903 Current portion of long-term obligation 975 905 ----------- ----------- Total current liabilities 274,446 361,970 Long term obligations 1,415 1,517 Long term capital lease obligation 1,071 1,197 Deferred income taxes 191,803 191,803 ----------- ----------- Total liabilities 468,735 556,487 ----------- ----------- Stockholders' equity: Common stock 426 424 Additional paid-in capital 194,180 193,260 Treasury stock (22,762) (12,468) Retained earnings 694,328 644,595 Accumulated other comprehensive income (loss) (35,125) 138,144 ----------- ----------- Total stockholders' equity 831,047 963,955 ----------- ----------- Total liabilities and stockholders' equity $1,520,442 $1,299,782 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. -3-
ALLIANCE SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share amounts) (unaudited) Three months Six months ended ended September 30, September 30, ------------------- ------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Revenue: Net revenues $64,466 $19,112 $111,870 $36,823 Cost of revenues 39,943 12,304 69,826 24,774 --------- --------- --------- --------- Gross Profit 24,523 6,808 42,044 12,049 --------- --------- --------- --------- Operating expenses: Research and development 3,467 4,244 7,058 7,449 Selling, general and 5,260 3,108 9,774 5,854 administrative --------- --------- --------- --------- Total operating expenses 8,727 7,352 16,832 13,303 --------- --------- --------- --------- Income (loss) from operations 15,796 (544) 25,212 (1,254) Gain on investments 13,485 3,696 61,002 55,302 Other income (expense), net 333 (270) 673 (149) --------- --------- --------- --------- Income before income taxes 29,614 2,882 86,887 53,899 Provision for income taxes 12,053 1,186 35,363 367 --------- --------- --------- --------- Income before equity in income 17,561 1,696 51,524 53,532 of investees Equity in income (loss) of (1,093) 2,796 (1,791) 4,328 investees --------- --------- --------- --------- Net income $16,468 $4,492 $49,733 $57,860 ========= ========= ========= ========= Net income per share Basic $0.40 $0.11 $1.20 $1.39 ========= ========= ========= ========= Diluted $0.39 $0.10 $1.17 $1.36 ========= ========= ========= ========= Weighted average number of common shares Basic 41,326 41,812 41,433 41,715 ========= ========= ========= ========= Diluted 42,537 42,995 42,665 42,572 ========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. -4-
ALLIANCE SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six months ended Sept 30, -------------------- 2000 1999 --------- -------- Cash flows from operating activities: Net income $49,733 $57,860 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,075 2,193 Equity in income (loss) of investees 1,791 (4,328) Gain on investments (61,002) (55,302) Changes in assets and liabilities: Accounts receivable (17,850) (671) Inventory (40,313) (13,157) Related party receivables (872) (73) Other assets 198 (467) Accounts payable 24,647 7,958 Accrued liabilities (3,493) (61) Deferred income tax - (2,096) Income tax payable 583 - --------- -------- Net cash used in operating (44,503) (8,144) activities --------- -------- Cash provided by investing activities: Purchase of property and equipment (2,335) (796) Proceeds from sale of marketable 70,029 18,063 securities Purchase of other investments (40,647) (7,537) --------- -------- Net cash provided by investing 27,047 9,730 activities --------- -------- Cash provided by financing activities: Net proceeds from issuance of common 922 5,901 stock Principal payments on lease (470) (668) obligation Repurchase of common stock (10,294) - Borrowings from credit line 10,000 Restricted cash 22 1,500 --------- -------- Net cash provided by financing 180 6,733 activities --------- -------- Net increase (decrease) in cash and (17,276) 8,319 cash equivalents Cash and cash equivalents at beginning 34,770 6,219 of the period --------- -------- Cash and cash equivalents at end of 17,494 $14,537 the period ========= ======== Schedule of non-cash financing activities: Property and equipment leases $ 415 $ - ========= ========
The accompanying notes are an integral part of these condensed consolidated financial statements. -5- ALLIANCE SEMICONDUCTOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) (unaudited) Note 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by Alliance Semiconductor Corporation (the "Company") in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary to present fairly the consolidated financial position of the Company and its subsidiaries, and their consolidated results of operations and cash flows. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal years ended March 31, 2000 and 1999 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 30, 2000. For purposes of presentation, the Company has indicated the first six months of fiscal 2001 and 2000 as ending on September 30, respectively; whereas, in fact, the Company's fiscal quarters ended on September 30, 2000 and October 2, 1999, respectively. The financial results for the second quarter of fiscal 2001 and 2000 were reported on a 13-week quarter. The results of operations for the three months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending March 31, 2001 and the Company makes no representations related thereto. Note 2. BALANCE SHEET COMPONENTS
September March 31, 30, 2000 2000 ------------ ----------- Inventory: Work in process $60,744 $20,737 Finished goods 17,008 16,702 ------------ ----------- $77,752 $37,439 ============ ===========
Note 3. INVESTMENTS In February and April 1995, the Company purchased shares of Chartered Semiconductor ("Chartered") for approximately $51.6 million and entered into a manufacturing agreement whereby Chartered agreed to provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2", if Alliance so chooses. In October 1999, Chartered successfully completed an initial public offering in Singapore and the United States. At March 31, 2000, the Company owned approximately 21.4 million ordinary shares or approximately 2.14 million American Depository Shares or "ADSs." These shares were subject to a six-month "lock-up", or no trade period, which expired in April 2000. In May 2000, Chartered completed a secondary public offering, in which Alliance decided not to participate, and as a result, the Company's shares were to be subject to an additional three-month "lock-up," which was to expire in August 2000. However, in June 2000, the underwriter of the secondary offering released the Company from the lock-up, and the Company sold some of its shares. The Company does not own a material percentage of the equity of Chartered. If the Company sells more that 50% of its original holdings in Chartered, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business. Additionally, because of the potential loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in Chartered, there can be no assurance that the Company can realize its value on its investment in Chartered. -6- In June 2000, the Company sold 500,000 shares of Chartered, recording a realized gain of approximately $33.5 million. As a result of the sale, at June 30, 2000, the Company owned approximately 16.4 million ordinary shares or approximately 1.64 million American Depository Shares or "ADSs." Prior to the fiscal third quarter of fiscal year 2000, the Company recorded its investment in Chartered as a long-term investment using the cost method of accounting. The Company currently accounts for its investment in Chartered as an available-for-sale marketable security in accordance with SFAS 115. At September 30, 2000, the Company owned approximately 16.4 million ordinary shares or approximately 1.64 million American Depository Shares or "ADSs." At September 30, 2000, the Company has recorded an unrealized gain of approximately $35.6 million, which is net of deferred tax of approximately $24.5 million, as part of accumulated other comprehensive income in the stockholder's equity section of the balance sheet. In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between September 1995 and July 1997 the Company invested approximately $70.4 million in USC in exchange for 190 million shares or 19.0% of the outstanding shares and 25% of the total wafer capacity. In April 1998, the Company sold 35 million shares of USC to an affiliate of UMC and received approximately US$31.7 million. In connection with the sale, the Company had the right to receive an additional NTD 665 million upon the occurrence of certain potential future events, which included the sale or transfer of USC shares by USC in an arms length transaction, or by a public offering of USC stock, or by the sale of all or substantially all of the assets of USC. In March 2000, Alliance received approximately NTD 665 million (US$21.5 million) as a result of the merger between USC and UMC, described below. Subsequent to the April 1998 USC stock sale, the Company owned approximately 15.5% of the outstanding shares of USC. In October 1998, USC issued 46 million shares to the Company by way of a dividend distribution. Additionally, USC also made a stock distribution to its employees, thereby reducing the Company's ownership in USC to 14.8% of the outstanding shares. Prior to the merger with UMC, the Company, as part of its investment in USC, was entitled to 25% of the output capacity of the wafer fabrication facility operated by USC, as well as a seat on the board of directors of USC. As a result of the capacity rights, the board seat, and certain contractual rights, Alliance had participated in both strategic and operating decisions of USC on a routine basis, had rights of approval with respect to major business decisions and concluded that it had significant influence on financial and operating decisions of USC. Accordingly, the Company accounted for its investment in USC using the equity method with a ninety-day lag in reporting the Company's share of results for the entity. In fiscal years 2000, 1999 and 1998 the Company reported its proportionate share of equity income of USC of $9.5 million, $10.9 million, and $15.5 million, net of tax, respectively. In October 1995, the Company entered into an agreement with UMC, and other parties, to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between January 1996 and July 1998, the Company invested approximately $16.8 million and owned approximately 3.2% of the outstanding shares of USIC and had the right to purchase approximately 3.7% of the manufacturing capacity of the facility. The Company accounted for its investment in USIC using the cost method of accounting prior to the merger with UMC in January 2000. In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. Through its representation on USC's board, the Company had the right to choose whether to consent to the merger and concluded it to be in the Company's best interest to do so. Alliance received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. At March 31, 2000 Alliance Semiconductor owned approximately 283.3 million shares, or approximately 3.2% of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively. As a result of the merger in January 2000, the Company no longer recorded its proportionate share of equity income in USC, as the Company no longer has an ability to exercise significant influence over UMC's operations. The investment in UMC is accounted for as a cost method investment. -7- During the fiscal fourth quarter of 2000, the Company recognized a $908 million pre-tax, non-operating gain as a result of the merger. The gain was computed based on the share price of UMC at the date of the merger (i.e. NTD 112, or US$ 3.5685), as well as the approximately $21.5 million additional gain related to the sale of the USC shares in April 1998. The Company has accrued approximately $2.8 million for the Taiwan securities transaction tax in connection with the shares received by the Company. This transaction tax will be paid, on a per share basis, when the securities are sold. In May 2000, the Company received an additional 20% or 56.7 million shares of UMC by way of a stock dividend. At September 30, 2000, the Company owned approximately 340 million shares of UMC. According to Taiwanese laws and regulations, 50% of the 340 million Alliance's UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up period expired in July 2000. Of the remaining 50%, or 170 million shares, approximately 34 million shares will become eligible for sale two years from the closing date of the transaction (i.e. January 2002), with approximately 34 million shares available-for-sale every six months thereafter, during years three and four (i.e.2002-2004). Subsequent to the completion of the merger, the Company accounts for the portion (approximately 50% at September 30, 2000) of its investment in UMC which becomes unrestricted within twelve months as an available-for-sale marketable security in accordance with SFAS 115. At September 30, 2000, the Company has recorded an unrealized loss of approximately $84.2 million, which is net of deferred tax of $57.8 million, as part of accumulated other comprehensive income in the stockholders' equity section of the balance sheet with respect to the short-term portion of the investments. The portion of the investment in UMC which is restricted beyond twelve months (approximately 50% of the Company's holdings at September 30, 2000) is accounted for as a cost method investment and is classified as a long-term investment. As this long-term portion becomes current over time, the investment will be transferred to short-term investments and will be accounted for as an available-for-sale marketable security in accordance with SFAS 115. The long-term portion of the investment becomes unrestricted between 2002 and 2004. Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. In 1998, the Company was approached by a startup company, Maverick Networks, Inc. ("Maverick"), regarding their need for imbedded memory in a internet router semiconductor that Maverick was designing. Because the Company was also interested in eventually entering the internet router semiconductor market, the Company entered into an agreement with Maverick which called for the Company to provide memory technology access to the Company's wafer production rights, and cash to Maverick, in exchange for certain rights to Maverick's technology and stock in Maverick. On May 31, 1999, Maverick completed a transaction with Broadcom Corporation, resulting in the Company selling its 39% ownership interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common stock. Based on Broadcom's closing share price on the date of sale, the Company recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of approximately $51.6 million based on the closing share price of Broadcom at the date of the merger. During fiscal 2000, the Company sold 275,600 shares of Broadcom stock and realized an additional pre-tax, non-operating gain of approximately $23.7 million. In February 2000, Broadcom Corporation announced a two for one stock split. In the September 2000 quarter, the Company sold 150,891 shares of Broadcom, recording a realized gain of approximately $13.5 million. The Company also recognized a $3.1 million gain during the June 2000 quarter related to the sale of shares of Broadcom stock. For the first six months of fiscal 2001, the Company has recorded approximately $16.6 million in realized gains on the sale of Broadcom stock. The Company records its investment in Broadcom as an available-for-sale marketable security in accordance with SFAS 115. At September 30, 2000, the Company owned 336,631 shares of Broadcom and recorded an unrealized gain of approximately $15.2 million, which is net of deferred tax of approximately $10.4 million, as part of accumulated other comprehensive income in the stockholders equity section of the balance sheet. In October 1999, the Company formed Alliance Venture Management, LLC ("Alliance Venture Management"), a California limited liability corporation, to manage and act as the general partner in the investment funds the Company intended to form. Alliance Venture Management does not directly invest in the investment funds with the Company, but is entitled to a management fee and a percentage of the net profits of the investment funds. This management company structure was created to provide incentives to the individuals who participate in the management of the investment funds by allowing such individuals limited participation in the -8- profits of the various investment funds through the management fee and percentage of the net profits paid by the investment funds. In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California limited partnerships. The Company, as the sole limited partner, owns 100% of the shares of each partnership. Alliance Venture Management acts as the general partner of these partnerships and receives a management fee of 1% of the total committed capital and 15% of the net profits from these partnerships for its managerial efforts. In February 2000, the Company formed Alliance Ventures III, LP ("Alliance Ventures III"), a California limited partnership. The Company, as the sole limited partner, owns 100% of the shares of this partnership. Alliance Venture Management acts as the general partner of this partnership and receives a management fee of 1% of the total committed capital and 16% of the profits from this partnership for its managerial efforts. Several members of the Company's senior management hold a majority of the units of Alliance Venture Management. After Alliance Ventures I was formed, the Company contributed all its then current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I to allow Alliance Venture Management to manage these investments. As of September 30, 2000, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested approximately $20.1 million in 9 companies with a total fund allocation of $20 million, and Alliance Ventures II, whose focus is in investing in internet start-up ventures has approximately $8.0 million in 10 companies, with a total fund allocation of $15 million. As of September 30, 2000, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested approximately $28.8 million in 9 companies, with a total fund allocation of $100 million. Several of these investments are accounted for as the equity method due to the Company's ability to exercise its influence on the operations of investees resulting primarily from ownership interest and/or board representation. The total equity in the net losses of the equity investees of these venture funds was approximately $1.1 million, net of tax, for the quarter ended September 30, 2000. For the six months ended September 30, 2000 the total equity in the net losses of the equity in investees was approximately, $1.8 million, net of tax. In August 1999, the Company made an investment in Orologic Corporation ("Orologic"), a fabless semiconductor company that develops high performance system on a chip solutions. In November 1999, the Company transferred its interest in Orologic to Alliance Ventures I, to allow it to be managed by Alliance Venture Management. Subsequently, in March 2000, Vitesse Semiconductor Corporation ("Vitesse") acquired Orologic. In connection with this merger, the Company received 728,293 shares of Vitesse for its equity interest in Orologic, after distribution of the management fee to Alliance Venture Management. As a result of the merger, the Company recognized a $69 million pre-tax, non-operating gain in its fiscal fourth quarter ending March 31, 2000, based on the closing share price of Vitesse of $96.25 on March 31, 2000, the closing date of the merger. In May, Alliance Ventures I made a distribution of the shares received from Vitesse to Alliance Venture Management and the Company. The Company records its investment in Vitesse Semiconductor Corporation as an available-for-sale marketable security in accordance with SFAS 115. At September 30, 2000, the Company owned 728,293 shares of Vitesse and recorded an unrealized loss of approximately $3.1 million, which is net of deferred tax of approximately $2.1 million, as part of accumulated other comprehensive income in the stockholders equity section of the balance sheet. In July 1999, the Company made an investment in Malleable Technologies, Inc. ("Malleable"), a fabless semiconductor company whose focus is in developing high density, voice over packet digital signal processors. In November 1999, the Company transferred its interest in Malleable to Alliance Ventures I, to allow it to be managed by Alliance Venture Management. On June 27, 2000, PMC-Sierra, Inc. ("PMC"), acquired Malleable. In connection with the merger, the Company received 68,152 shares of PMC for its 7% interest in Malleable, after distribution of the management fee to Alliance Venture Management. In the first fiscal quarter of 2001, the Company reported a pre-tax non-operating gain of approximately $11.0 million based on the closing share price of PMC of $182.875 on June 27, 2000, the closing date of the merger. The Company records its investment in PMC-Sierra, Inc. as an available-for-sale marketable security in accordance with SFAS 115. At September 30, 2000, the Company owned 68,152 shares of PMC-Sierra and recorded an unrealized loss of approximately $1.3 million, which is net of deferred tax of $898,000, as part of accumulated other comprehensive income in the stockholders equity section of the balance sheet. -9- In August 2000, the Company agreed to invest $20 million in Solar Venture Partners, LP. ("Solar"), a venture capital partnership whose focus is in investing in early stage companies in the following areas: networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Web and e-commerce, semiconductors for emerging markets and design automation. The Company also has an option during the next six months of investing an additional $30 million to $55 million in Solar. In addition to a number of outside investors, some of the Company's executives have or are planning to personally invest in Solar. As of September 30, 2000, the Company has invested, in the form of two promissory notes a total of $7.0 million in Solar. Both promissory notes bear interest at a rate of 6% per annum and are due on December 31, 2000. As summary of marketable securities held by the Company at September 30, 2000 is as follows (in thousands):
Number of Shares Market Value ---------------- ------------ (in thousands) UMC 340,000 $727,068 Chartered 1,642 99,638 Broadcom 337 41,684 Vitesse 728 64,772 PMC Sierra 68 14,670 ------------ Total $947,832 ============
Note 4. COMPREHENSIVE INCOME The following are the components of comprehensive income:
Three months ended Six months ended September 30, September 30, ----------------- ------------------ 2000 1999 2000 1999 -------- ------- -------- -------- (in thousands) Net income $16,468 $4,493 $49,733 $57,861 Unrealized gain (92,295) (9,249) (173,269) 3,945 (loss) on marketable securities, net of deferred taxes of ($63,346) and ($118,922) at Sept 30, 2000 and ($6,402) and $2,652 at Sept 30, 1999, respectively Cumulative translation - 2,508 - 6,902 adjustments -------- ------- -------- -------- Comprehensive ($75,828) ($2,248)($123,536) $68,708 income (loss) ======== ======= ======== ========
The components of accumulated other comprehensive income (loss) are as follows:
September March 31, 30, 2000 2000 ----------- ------------ (in thousands) Unrealized gain (loss) marketable securities, net of deferred taxes of ($24,108) at September 30, ($35,125) $138,144 2000 and $94,814 at March 31, 2000 ----------- ------------ Accumulated other comprehensive ($35,125) $138,144 income (loss) =========== ============
-10- Note 5. LETTERS OF CREDIT As of September 30, 2000, one million dollars of standby letters of credit were outstanding and expire on or before September 1, 2001, which are secured by restricted cash and short-term investments. Note 6. SHORT-TERM BORROWINGS In September 2000, the Company borrowed $10 million under an open-ended line of credit, against a portion of its marketable securities holdings, bearing interest at a rate of 7.5% per annum. Note 7. NET INCOME PER SHARE Basic Earnings Per Share (EPS) is computed by dividing net income available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the proceeds obtained upon exercise of stock options. The computations for basic and diluted EPS are presented below:
Three months ended Six months ended September 30, September 30, ------------------ ------------------- 2000 1999 2000 1999 --------- ------- --------- --------- (in thousands) Net income $16,468 $4,492 $49,733 $57,860 ========= ======= ========= ========= Weighted average shares 41,326 41,812 41,433 41,715 outstanding Effect of dilutive employee 1,211 1,183 1,232 857 stock options --------- ------- --------- --------- Average shares outstanding 42,537 42,995 42,665 42,572 assuming dilution ========= ======= ========= ========= Net income per share: Basic $0.40 $0.11 $1.20 $1.39 ========= ======= ========= ========= Diluted $0.39 $0.10 $1.17 $1.36 ========= ======= ========= =========
The following are not included in the above calculation as they were considered anti-dilutive:
Three months ended Six months ended September 30, September 30, --------------------- ------------------- 2000 1999 2000 1999 --------- ---------- --------- -------- (in thousands) Employee stock options 173 91 162 882 outstanding ========= ========== ========= ========
Note 8. LEGAL MATTERS In December 1996, Alliance Semiconductor International Corporation ("ASIC"), a wholly-owned subsidiary of the Company, was served with a complaint filed in Federal Court alleging that ASIC had infringed two patents owned by AMD related to flash memory devices, and seeking injunctive relief and damages. In March 1997, the Company was added as a defendant. In April 1996, the Court allowed AMD to expand its claims to include several new flash products which had been recently announced by the Company. In January and February 2000, both parties filed for motions for summary judgment. Each defendant has denied the allegations of the complaint and asserted a counterclaim for declaration that each of the AMD patents is invalid and not infringed by such defendant. A trial date is currently set for January 2001. In October 2000, the Company and AMD participated in a court ordered mediation and reached a preliminary agreement in principle on terms of a proposed settlement. The impact on the Company cannot be estimated at this time. However, there can be no assurance that a final settlement will be reached and executed. The Company believes the resolution of this matter will not have a material adverse effect on its financial conditions and its results of operations. -11- In July 1998, the Company learned that a default judgment was entered against the Company in Canada, in the amount of approximately US$170 million, in a case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805 (Victoria Registry). The Company, which had previously not participated in the case, believes that it never was properly served with process in this action, and that the Canadian court lacks jurisdiction over the Company in this matter. In addition to jurisdictional and procedural arguments, the Company also believes it may have grounds to argue that the claims against the Company should be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the court set aside the default judgment against the Company. In April 1999, the plaintiffs were granted leave by the Court to appeal this judgment. Oral arguments were made before the Court of Appeals in June 2000. In July 2000 the Court of Appeals instructed the lower Court to allow the parties to take depositions regarding the issue of service of process, while also setting aside the default judgment against the Company. In February 1997, Micron Technology, Inc. filed an antidumping petition with the United States International In February 1997, Micron Technology, Inc. filed an antidumping petition with the United States International Trade Commission ("ITC") and United States Department of Commerce ("DOC"), alleging that SRAMs fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing SRAMs was materially injured or threatened with material injury by reason of imports of SRAMs fabricated in Taiwan. After a final affirmative DOC determination of dumping and a final affirmative ITC determination of injury, DOC issued an antidumping duty order in April 1998. Under that order, the Company's imports into the United States on or after approximately April 16,1998 of SRAMs fabricated in Taiwan are subject to a cash deposit in the amount of 50.15% (the "Antidumping Margin") of the entered value of such SRAMs. (The Company posted a bond in the amount of 59.06% (the preliminary margin) with respect to its importation, between approximately October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the Company and others filed an appeal in the United States Court of International Trade (the "CIT"), challenging the determination by the ITC that imports of Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On June 30, 1999, the CIT issued a decision remanding the ITC's affirmative material injury determination to the ITC for reconsideration. The ITC's remand determination reaffirmed its original determination. The CIT considered the remand determination and remanded it back to the ITC for further reconsideration. On June 12, 2000, in its second remand determination the ITC voted negative on injury, thereby reversing its original determination that Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The second remand determination was transmitted to the CIT on June 26, 2000 for consideration. Micron has appealed the decision of the CIT to the Court of Appeals for the Federal Circuit. The Company cannot predict either the timing or the eventual results of the appeal, although it is expected to take a year or more to conclude. Until a final judgment is entered in the appeal, no final duties will be assessed on the Company's entries of SRAMs from Taiwan covered by the DOC antidumping duty order. If the appeal is successful, the antidumping order will be terminated and cash deposits will be refunded with interest. If the appeal is unsuccessful, the Company's entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 2000 will be liquidated at the deposit rate in effect at the time of entry. On subsequent entries of Taiwan-fabricated SRAMs, the Company will continue to make cash deposits in the amount of 50.15% of the entered value. In April 2001, the Company will have an opportunity to request a review of its sales of Taiwan-fabricated SRAMs from April 1, 2000 through March 31, 2001 (the "Review Period"). If it does so, the amount of antidumping duties, if any, owed on imports from April 2000 through March 2001 will remain undetermined until the conclusion of the review in early 2002. If the DOC found, based upon analysis of the Company's sales during the Review Period, that antidumping duties either should not be imposed or should be imposed at a lower rate than the Antidumping Margin, the difference between the cash deposits made by the Company, and the deposits that would have been made had the lower rate (or no rate, as the case may be) been in effect, would be returned to the Company, plus interest. If, on the other hand, the DOC found that higher margins were appropriate, the Company would have to pay difference between the cash deposits paid by the Company and the deposits that would have been made had the higher rate been in effect. At September 30, 2000, the Company had posted a bond secured by a letter of credit in the amount of approximately $1.7 million and made cash deposits in the amount of $1.7 million relating to the Company's importation of Taiwan-manufactured SRAMs. -12- Note 9. COMMITMENTS In August 2000, the Company entered into an agreement with Tower Semiconductor Ltd. ("Tower") under which Alliance will make a $75 million strategic investment in Tower as part of Tower's plan to build its new fabrication facility. In return for its investment, Alliance will receive equity, corresponding representation on Tower's Board of Directors and committed production capacity in the advanced fabrication facility which Tower intends to commence building this year. In August 2000, the Company agreed to invest $20 million in Solar Venture Partners, LP ("Solar"), a venture capital partnership whose focus is in investing in early stage companies in networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Internet and e-commerce, semiconductors for emerging markets, and design automation. The Company also has an option during the next six months of investing an additional $30 million to $55 million in Solar. A number of the company's executives have or are planning to personally invest in Solar. As of September 30, 2000, the Company has invested, in the form of two promissory notes, a total of $7.0 million in Solar. Both promissory notes bear interest at a rate of 6% per annum and are due on December 31, 2000. -13- ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WHEN USED IN THIS REPORT, THE WORDS "EXPECTS," ANTICIPATES," "BELIEVES," "ESTIMATES" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS, ARE SUBJECT TO RISKS AND UNCERTAINTIES AND INCLUDE THE FOLLOWING STATEMENTS CONCERNING THE TIMING OF NEW PRODUCT INTRODUCTIONS; THE FUNCTIONALITY AND AVAILABILITY OF PRODUCTS UNDER DEVELOPMENT; TRENDS IN THE PERSONAL COMPUTER, NETWORKING, TELECOMMUNICATIONS, INSTRUMENTATION AND CONSUMER MARKETS, IN PARTICULAR AS THEY MAY AFFECT DEMAND FOR OR PRICING OF THE COMPANY'S PRODUCTS; THE PERCENTAGE OF EXPORT SALES AND SALES TO STRATEGIC CUSTOMERS; THE PERCENTAGE OF REVENUE BY PRODUCT LINE; THE AVAILABILITY AND COST OF PRODUCTS FROM THE COMPANY'S SUPPLIERS; CHANGES IN STOCK PRICE OF BROADCOM CORPORATION, CHARTERED SEMICONDUCTOR, UNITED MICROELECTRONICS CORPORATION, VITESSE SEMICONDUCTOR CORPORATION, PMC-SIERRA, INC. AND TOWER SEMICONDUCTOR LTD.; ADVERSE CHANGES IN VALUE OF INVESTMENTS MADE BY ALLIANCE VENTURE MANAGEMENT, LLC; AND THE COMPANY'S POTENTIAL STATUS AS INVESTMENT ACT OF 1940 REPORTING COMPANY. THESE RISKS AND UNCERTAINTIES INCLUDE THOSE SET FORTH IN ITEM 2 (ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS") OF THIS REPORT, AND IN ITEM 1 (ENTITLED "BUSINESS") OF PART I AND IN ITEM 7 (ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS") OF PART II OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 1, 2000 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 2000, AND THE SUBSEQUENT QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDING JULY 1, 2000. THESE RISKS AND UNCERTAINTIES, OR THE OCCURRENCE OF OTHER EVENTS, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS REPORT. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR TO REFLECT ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH FORWARD-LOOKING STATEMENT IS BASED, IN WHOLE OR IN PART. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain operating data as a percentage of net revenue:
Three months ended Six months ended September 30, September 30, --------------------- ------------------ 2000 1999 2000 1999 ---------- --------- -------- -------- Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 62.0 64.4 62.4 67.3 ---------- --------- -------- -------- Gross profit 38.0 35.6 37.6 32.7 Operating expenses: Research and development 5.4 22.2 6.3 20.2 Selling, general and 8.2 16.3 8.7 15.9 administrative ---------- --------- -------- -------- Total operating expenses 13.6 38.5 15.0 36.1 ---------- --------- -------- -------- Income (loss) from operations 24.4 (2.9) 22.6 (3.4) Gain on Investments 20.9 19.3 54.5 150.2 Other income (expense), net 0.5 (1.4) 0.6 (0.4) ---------- --------- -------- -------- Income before income taxes 45.8 15.0 77.7 146.4 Provision for income taxes 18.7 6.2 31.6 1.0 ---------- --------- -------- -------- Income before equity in income 27.1 8.9 46.1 145.4 of investees Equity in income (loss) of (1.7) 14.6 (1.6) 11.8 investees ---------- --------- -------- -------- Net income 25.4% 23.4% 44.5% 157.2% ========== ========= ======== ========
NET REVENUES Net revenues increased by 237% to $64.5 million for the three months ended September 2000 from $19.1 million for the similar period in 1999. The increase in revenues was mainly due an 111% increase in unit shipments of dynamic random access memory ("DRAM") and static random access memory ("SRAM") products , combined with an overall increase of approximately 52% in the overall average selling prices of the Company's products. -14- During this comparison period the overall blended average selling prices ("ASP") for SRAMs increased by 74% and DRAMS by 36%. Revenues from the Company's DRAM products contributed approximately 59% of the Company's net revenues for the September 2000 quarter and approximately 61% of the Company's net revenues for the September 1999 quarter. The DRAM revenues increased by 235% to $37.9 million in the September 2000 quarter from $11.3 million for the September 1999 quarter. The revenue growth in DRAMs during this period was primarily related to increased shipments of 4 and 16 Mb products to the non-PC market segments (i.e. communications, networking and consumer OEMs). Revenues from the Company's SRAM products contributed approximately 41% of the Company's net revenues for the September 2000 quarter and approximately 38% of the Company's net revenues for the September 1999 quarter. The SRAM revenues increased by 244% to $26.3 million in the September 2000 quarter from $7.6 million for the September 1999 quarter. During the September 2000 quarter, sales from the Company's 4-Mbit 5V Fast Asynchronous and 4-Mbit 3.3V Fast Asynchronous SRAMS in the 512K x 8 and 256K x 16 configuration increased $10.4 million over the June 2000 quarter. There were no sales from these products in the September 1999 quarter. Also, the Company experienced higher average selling prices and higher unit shipments on other SRAM products. In the September 2000 quarter, sales to the computing market segment accounted for approximately 18% of the total sales, with 82% attributable to sales in the communication, networking and consumer markets, whereas in the September 1999 quarter approximately 49% of the Companies sales were in the computing market segment and 51 % in the non-PC market segments (i.e. communications, networking and consumer). In the September 2000 quarter, sales by geographic areas were as follows; U.S. 36%, Asia 48% and Europe 17%, whereas during the September 1999 quarter U.S., Asia and Europe accounted for 23%, 53% and 24% respectively. One customer accounted for approximately 11.6% of the Company's net revenues in the September 2000 quarter, whereas one customer accounted for 10.9% of the Company's net revenues in the September 1999 quarter. Net revenues for the six months ended September 2000 increased by 204% to $111.9 million compared to $36.6 million during the same period last year. Again, the revenue increase during the first six months of fiscal year 2001 was primarily due to a 100% increase in unit shipments of SRAM and DRAM products as well as an overall average selling price increase of 52%. The blended average selling prices for SRAMs increased by 74% while the average DRAM price increased by 55% during the six-month comparison period. Revenues from the Company's SRAM products during the first six months of fiscal year 2001 accounted for approximately 42% of the total net revenues with DRAMs accounting for the balance or 58%. The revenue growth in the DRAM product line was primarily 16 Mb products which were sold primarily in the communication, networking and consumer markets. For the first six months of fiscal year 2001, sales to the computing market segment accounted for approximately 16% of total sales, with 84% attributable to sales in the communication, networking and consumer markets whereas during the first six months of fiscal year 2000, approximately 46% of the Companies sales were in the computing market segment and 54% in the non-PC market segments (i.e. communications, networking and consumer). The Companies sales and marketing focus is now primarily in the communications, networking, wireless and consumer markets. The geographic breakdown of sales for the first six months of fiscal 2001 was 36% in U.S., 46% in Asia, and 18% in Europe whereas during the first six months of fiscal year 2000 U.S., Asia and European sales accounted for approximately 35%, 44% and 21%, respectively. The largest customer accounted for approximately 8.4% of the Company's net revenues during the first six months of fiscal 2001 whereas one customer accounted for approximately 11.3% of total revenues during the first six months of fiscal 2000. -15- Generally, the markets for the Company's products are characterized by volatile supply and demand conditions, numerous competitors, rapid technological change and product obsolescence. These conditions could require the Company to make significant shifts in its product mix in a relatively short period of time. These changes involve several risks, including, among others, constraints or delays in timely deliveries of products from the Company's suppliers; lower than anticipated wafer manufacturing yields; lower than expected throughput from assembly and test suppliers; and less than anticipated demand and selling prices. The occurrence of any problems resulting from these risks could have a material adverse effect on the Company's operating results. GROSS PROFIT Gross profit for the second quarter of fiscal 2001 was $24.5 million, or 38% of net revenues compared to a gross profit of $6.8 million or 36% for the same period of fiscal 2000. The increase in gross profits primarily resulted from higher overall average selling prices for the Company's DRAM and SRAM products and higher unit shipments as well as an increased mix of higher margin, higher density SRAM products. The gross profit was $42.0 million or 38% of net revenues for the first six months of fiscal 2001 compared to a gross profit of $12.0 million, or 33% for the first six months of fiscal 2000. The increase in the gross profits for the first six months primarily resulted from higher average selling prices coupled with higher units shipments as well as an increased mix of higher margin, higher density SRAM products. The Company is subject to a number of factors which may have an adverse impact on gross margins including the availability and cost of products from the Company's suppliers; increased competition and related decreases in average unit selling prices; changes in the mix of products sold; timing of new product introductions and volume shipments; and antidumping duties related to the importation of products from Taiwan. In addition, the Company may seek to add additional foundry suppliers and transfer existing and newly developed products to more advanced manufacturing processes. The commencement of manufacturing at a new foundry is often characterized by lower yields as the manufacturing process is refined. There can be no assurance that one or more of the factors set forth in this paragraph will not have a material adverse effect on the Company's gross margins in future periods. RESEARCH AND DEVELOPMENT Research and development expenses consist principally of salaries and benefits for engineering design, contracted development efforts, facilities costs, equipment and software depreciation and amortization, wafer masks and tooling costs, test wafers and other expense items. Research and development expenses were $3.5 million, or 5% of net revenue in the second quarter of fiscal 2001 compared to $4.2 million, or 22% of net revenue in the same period of the prior fiscal year. Research and development expenses in the first six months of fiscal 2001 were $7.1 million, or 6% of net revenues compared to $7.4 million, or 20% for the same period one year ago. The reduction in expense for the second quarter of fiscal 2001 as compared to the same period one-year ago, as well as the reduction during the first six months of fiscal year 2001 versus 2000 was due to a decrease in mask and tooling costs. During September 2000 quarter and first six months of fiscal 2000, the Company's development efforts focused on advanced process and design technology involving SRAMs, DRAMs and Flash memory products. The Company believes that investments in research and development are necessary to remain competitive in the marketplace and accordingly, research and development expenses may increase in absolute dollars and may also increase as a percentage of net revenue in future periods. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses generally include salaries and benefits, sales commissions, marketing costs, travel, equipment depreciation and software amortization, facilities costs, bad debt expense as well as insurance and legal costs for the Company's sales, marketing, customer support and administrative personnel. Selling, general and administrative expenses were $5.3 million, or 8% of net revenue in the second quarter of fiscal 2001 compared to $3.1 million, or 16% of net revenue in the same period of the prior fiscal year. For the -16- first six months of fiscal 2001, expenses were $9.8 million, or 9% compared to $5.9 million, or 16% one year ago. The increase in selling, general and administrative expenses for the September quarter 2001 versus September 2000 as well as the first six months of fiscal 2001 compared to one year ago was primarily the result of increased sales commissions due to the increase in revenues as well as increased headcount and personnel related costs and higher legal expenses. Selling, general and administrative expenses may increase in absolute dollars and may also increase as a percentage of net revenue in future periods. Selling, general and administrative expenses may increase in absolute dollars and may also fluctuate as a percentage of net revenues in the future primarily due higher commissions, which are dependent on the level of revenues as well as increased headcount and personnel related costs. GAIN ON INVESTMENTS In the September 2000 quarter, the Company sold 150,891 shares of Broadcom, recording a gain of approximately $13.5 million and in the June 2000 quarter recognized a $3.1 million gain related to the sale of shares of Broadcom stock. During the September 1999 quarter, the Company sold 150,000 shares of Broadcom stock and reported a gain of approximately $3.7 million in addition to the gain of approximately $51.6 million recorded in the June 1999 quarter, when Broadcom acquired Maverick Networks, an entity that the Company had 28% interest in. During the June 2000 quarter, the Company sold 500,000 shares of Chartered Semiconductor and reported a gain of approximately $33.5 million. In June 2000, PMC-Sierra, Inc. ("PMC"), acquired Malleable Technologies, Inc. ("Malleable"). In connection with the merger, the Company received 68,152 shares of PMC, after distribution to Alliance Venture Management, for its 7% interest in Malleable. The Company reported a gain of approximately $11.0 million during the June 2000 quarter. OTHER INCOME (EXPENSE), NET Other Income (expense), net represents interest income from short-term investments and interest expense on short and long-term obligations. Other Income (expense), net was approximately $333,000 in the September 2000 quarter compared Other expense, net of approximately $270,000 in the September 1999 quarter. For the six months of fiscal 2001, Other Income (expense), net was approximately $673,000 compared to Other Expense, net of approximately $149,000 for the first six months of fiscal 2000. The change from fiscal 2000 to fiscal 2001 was attributed to higher interest income, and lower interest expense. PROVISION FOR INCOME TAXES Income tax expense for the September 2000 quarter was approximately $12.1 million and $35.4 million for the first six months of fiscal 2001 for an overall effective tax rate of 40.7%. During the September 1999 quarter the Company recorded tax expense of $1.2 million and $.4 million for the first six months of fiscal year 2000. During the June 1999 quarter the Company was able to utilize existing loss carryforwards and tax credits, which were available to offset the gain on marketable securities related to the Broadcom shares. EQUITY IN INCOME OF INVESTEES Prior to the UMC merger discussed elsewhere, the Company had made several investments with other parties to form a separate Taiwanese company, USC. This investment was accounted for under the equity method of accounting with a ninety-day lag in reporting the Company's share of results for the entity. Equity in income of USC reflects the company's share of income earned by USC for the previous quarter. During the first six months of fiscal 2000, the Company reported its share in the income of USC in the amount of $4.3 million. As a result of the UMC merger in January 2000, the Company no longer recorded its proportionate share of equity income in USC, as the Company no longer has an ability to exercise significant influence over UMC's operations. The investment in UMC is accounted for as a cost method investment. -17- As of September 30, 2000, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested approximately $20.1 million in 9 companies with a total fund allocation of $20 million, and Alliance Ventures II, whose focus is in investing in internet start-up ventures has approximately $8.0 million in 10 companies, with a total fund allocation of $15 million. As of September 30, 2000, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested approximately $28.8 million in 9 companies, with a total fund allocation of $100 million. The Company, through Alliance Venture Management, invested approximately $18.5 million during the second quarter of fiscal 2001 and a total of $33.6 million during the first six months of fiscal 2001. A total of $56.9 million have been invested in three Alliance ventures funds, Alliance Ventures I, Alliance Ventures II and Alliance Ventures III. Several of these investments are accounted for on the equity method due to the Company's ability to exercise significant influence on the operations of investees resulting primarily from ownership interest and/or board representation. The Company's proportionate share in the net losses of the equity investees of these venture funds was approximately $1.1 million net of deferred tax, for the quarter ended September 30, 2000 and approximately $1.8 million, net of deferred tax for the six months ended September 30, 2000. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's quarterly and annual operating results have historically been, and will continue to be, subject to quarterly and other fluctuations due to a variety of factors, including: general economic conditions; changes in pricing policies by the Company, its competitors or its suppliers; anticipated and unanticipated decreases in unit average selling prices of the Company's products; fluctuations in manufacturing yields, availability and cost of products from the Company's suppliers; the timing of new product announcements and introductions by the Company or its competitors; changes in the mix of products sold; the cyclical nature of the semiconductor industry; the gain or loss of significant customers; increased research and development expenses associated with new product introductions; market acceptance of new or enhanced versions of the Company's products; seasonal customer demand; and the timing of significant orders. Results of operations could also be adversely affected by economic conditions generally or in various geographic areas, other conditions affecting the timing of customer orders and capital spending, a downturn in the market for personal computers, or order cancellations or rescheduling. Additionally, because the Company is continuing to increase its operating expenses for personnel and new product development to be able to support increased sales levels, the Company's results of operations will be adversely affected if such increased sales levels are not achieved. The markets for the Company's products are characterized by rapid technological change, evolving industry standards, product obsolescence and significant price competition and, as a result, are subject to decreases in average selling prices. The Company experienced significant deterioration in the average selling prices for its SRAM and DRAM products during fiscal years 1999,1998 and 1997. The Company is unable to predict the future prices for its products. Historically, average selling prices for semiconductor memory products have declined and the Company expects that average-selling prices will decline in the future. Accordingly, the Company's ability to maintain or increase revenues will be highly dependent on its ability to increase unit sales volume of existing products and to successfully develop, introduce and sell new products. Declining average selling prices will also adversely affect the Company's gross margins unless the Company is able to significantly reduce its cost per unit in an amount to offset the declines in average selling prices. There can be no assurance that the Company will be able to increase unit sales volumes of existing products, develop, introduce and sell new products or significantly reduce its cost per unit. There also can be no assurance that even if the Company were to increase unit sales volumes and sufficiently reduce its costs per unit, the Company would be able to maintain or increase revenues or gross margins. The Company usually ships more product in the third month of each quarter than in either of the first two months of the quarter, with shipments in the third month higher at the end of the month. This pattern, which is common in the semiconductor industry, is likely to continue. The concentration of sales in the last month of the quarter may cause the Company's quarterly results of operations to be more difficult to predict. Moreover, a disruption in the Company's production or shipping near the end of a quarter could materially reduce the Company's net sales for that quarter. The Company's reliance on outside foundries and independent assembly and testing houses reduces the Company's ability to control, among other things, delivery schedules. The cyclical nature of the semiconductor industry periodically results in shortages of advanced process wafer fabrication capacity such as the Company has experienced from time to time. The Company's ability to maintain adequate levels of inventory is primarily dependent upon the Company obtaining sufficient supply of products to -18- meet future demand, and any inability of the Company to maintain adequate inventory levels may adversely affect its relations with its customers. In addition, the Company must order products and build inventory substantially in advance of products shipments, and there is a risk that because demand for the Company's products is volatile and subject to rapid technology and price change, the Company will forecast incorrectly and produce excess or insufficient inventories of particular products. This inventory risk is heightened because certain of the Company's key customers place orders with short lead times. The Company's customers' ability to reschedule or cancel orders without significant penalty could adversely affect the Company's liquidity, as the Company may be unable to adjust its purchases from its independent foundries to match such customer changes and cancellations. The Company has in the past produced excess quantities of certain products, which has had a material adverse effect on the Company's results of operations. There can be no assurance that the Company in the future will not produce excess quantities of any of its products. To the extent the Company produces excess or insufficient inventories of particular products, the Company's results of operations could be adversely affected, as was the case in fiscal 1999, 1998 and 1997, when the Company recorded pre-tax charges totaling approximately $20 million, $15 million and $17 million, respectively, primarily to reflect a decline in market value of certain inventory. The Company currently relies on independent foundries to manufacture all of the Company's products. Reliance on these foundries involves several risks, including constraints or delays in timely delivery of the Company's products, reduced control over delivery schedules, quality assurance and costs and loss of production due to seismic activity, weather conditions and other factors. In or about October 1997, a fire caused extensive damage to United Integrated Circuits Corporation ("UICC"), a foundry joint venture between UMC and various companies. UICC is located next to UMC in the Hsin-Chu Science-Based Industrial Park, where Company has products manufactured. UICC suffered an additional fire in January 1998, and since October 1996, there have been at least two other fires at semiconductor manufacturing facilities in the Hsin-Chu Science-Based Industrial Park. There can be no assurance that fires or other disasters will not have a material adverse affect on UMC in the future. In addition, as a result of the rapid growth of the semiconductor industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints have been placed on the water and electricity supply in that region. Any shortages of water or electricity could adversely affect the Company's foundries' ability to supply the Company's products, which could have a material adverse effect on the Company's results of operations or financial condition. Although the Company continuously evaluates sources of supply and may seek to add additional foundry capacity, there can be no assurance that such additional capacity can be obtained at acceptable prices, if at all. The occurrence of any supply or other problem resulting from these risks could have a material adverse effect on the Company's results of operations, as was the case during the third quarter of fiscal 1996, during which period manufacturing yields of one of the Company's products were materially adversely affected by manufacturing problems at one of the Company's foundry suppliers. There can be no assurance that other problems affecting manufacturing yields of the Company's products will not occur in the future. There is an ongoing risk that the suppliers of wafer fabrication, wafer sort, assembly and test services to the Company may increase the price charged to the Company for the services they provide, to the point that the Company may not be able to profitably have its products produced at such suppliers. The occurrence of such price increases could have a material adverse affect on the Company's results of operations. The Company conducts a significant portion of its business internationally and is subject to a number of risks resulting from such operations. Such risks include political and economic instability and changes in diplomatic and trade relationships, foreign currency fluctuations, unexpected changes in regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. With the Company's commitment to invest in a new fabrication facility of Tower Semiconductor Ltd. in Israel, there will additional risks at that facility because of the political instability in that region. Current or potential customers of the Company in Asia, for instance, may become unwilling or unable to purchase the Company's products, and the Company's Asian competitors may be able to become more price-competitive relative to the Company due to declining values of their national currencies. There can be no assurance that such factors will not adversely impact the Company's results of operations in the future or require the Company to modify its current business practices. Additionally, other factors may materially adversely affect the Company's results of operations. The Company relies on domestic and offshore subcontractors for die assembly and testing of products, and is subject to risks of disruption in adequate supply of such services and quality problems with such services. The Company is subject to the risks of shortages of goods or services and increases in the cost of raw materials used in the manufacture or assembly of the Company's products. The Company faces intense competition, and many of its principal competitors and potential competitors have substantially greater financial, technical, marketing, distribution and -19- other resources, broader product lines and longer-standing relationships with customers than does the Company, any of which factors may place such competitors and potential competitors in a stronger competitive position than the Company. The Company's corporate headquarters are located near major earthquake faults, and the Company is subject to the risk of damage or disruption in the event of seismic activity. There can be no assurance that any of the foregoing factors will not materially adversely affect the Company's results of operations. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges, and establishes respective accounting standards for reporting changes in the fair value of the instruments. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Upon adoption of SFAS No. 133, we will be required to adjust hedging instruments to fair value in the balance sheet, and recognize the offsetting gain or loss as transition adjustments to be reported in net income or other comprehensive income, as appropriate, and presented in a manner similar to the cumulative effect of a change in accounting principle. We believe the adoption of this statement will not have a significant effect on our results of operations. Current pending litigation, administrative proceedings and claims are set forth in Item 1-Legal Proceedings. The Company intends to vigorously defend itself in the litigation and claims and, subject to the inherent uncertainties of litigation and based upon discovery completed to date, management believes that the resolution of these matters will not have a material adverse effect on the Company's financial position. However, should the outcome of any of these actions be unfavorable, the Company may be required to pay damages and other expenses, or may be enjoined from manufacturing or selling any products deemed to infringe the intellectual property rights of others, which could have a material adverse effect on the Company's financial position or results of operations. Moreover, the semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. The Company has from time to time received, and believes that it likely will in the future receive, notices alleging that the Company's products, or the processes used to manufacture the Company's products, infringe the intellectual property rights of third parties, and the Company is subject to the risk that it may become party to litigation involving such claims (the Company currently is involved in patent litigation). In the event of litigation to determine the validity of any third-party claims (such as the current patent litigation), or claims against the Company for indemnification related to such third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from other matters. In the event of an adverse ruling in such litigation, the Company might be required to cease the manufacture, use and sale of infringing products, discontinue the use of certain processes, expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology. In addition, depending upon the number of infringing products and the extent of sales of such products, the Company could suffer significant monetary damages. In the event of a successful claim against the Company and the Company's failure to develop or license a substitute technology, the Company's results of operations could be materially adversely affected. The Company also, as a result of an antidumping proceeding commenced in February 1997, must pay a cash deposit equal to 50.15% of the entered value of any SRAMs manufactured (wafer fabrication) in Taiwan, in order to import such goods into the U.S. Although the Company may be refunded such deposits in the future (see Item 1- Legal Proceedings), the deposit requirement, and the potential that all entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 1999 will be liquidated at the bond rate or deposit rate in effect at the time of entry, may materially adversely affect the Company's ability to sell in the United States SRAMs manufactured (wafer fabrication) in Taiwan. The Company currently manufactures SRAMs in Singapore and the United States, and may be able to support its U.S. customers with products that are not subject to antidumping duties. There can be no assurance, however, that the Company will be able to do so. The Company, through Alliance Venture Management, generally directs the individual funds to invest in startup, pre-IPO (initial public offering) companies. These types of investments are inherently risky, and many venture funds have a large percentage of investments decrease in value or fail. Successful investing relies on the skill of the investment managers, but also on market and other factors outside the control of the managers. Over the last few years, the market for these types of investments has been successful and many venture capital funds have been profitable. More recently, the market has weaker, so while the Company has been successful in its recent investments, there can be no assurance as to any future or continued success. It is likely there will be a downturn in the success of these types of investments in the future and the Company will suffer significant diminished success in these investments. There can be no assurance, and in fact it is likely, that many or most, and perhaps -20- all of the Company's venture type investments may fail, resulting in the complete loss of some or all the money the Company has invested in these early stage companies. As a result of the foregoing factors, as well as other factors affecting the Company's results of operations, past performance should not be considered to be a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. In addition, stock prices for many technology companies are subject to significant volatility, particularly on a quarterly basis. If revenues or earnings fail to meet expectations of the investment community, there could be an immediate and significant impact on the market price of the Company's Common Stock. Due to the foregoing factors, it is likely that in some future quarter or quarters the Company's results of operations may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, the Company had approximately $17.5 million in cash and cash equivalents, a decrease of approximately $17.3 million from March 31, 2000; and approximately $446.1 million in working capital, a decrease of approximately $169.8 million from $615.9 million at March 31, 2000. Additionally, the Company had short-term investments in marketable securities whose fair value at September 30, 2000 was $584.3 million. The Company's operating activities utilized cash of $44.5 million in first six months of fiscal 2001 compared to $8.1 million in the first six months of fiscal 2000. Cash utilized in operating activities in the first six months of fiscal 2001 was primarily the result of increased levels of inventories and accounts receivable due to increased growth in sales. Investing activities provided cash in the amount of $27.0 million during the first six months of fiscal 2001 as the result of the proceeds from the sale of marketable securities of $70.0 million, offset in part, by $40.6 million in investments made by Alliance Ventures and in Solar Venture Partners, and purchases of equipment of $2.3 million. Net cash provided by financing activities during the first six months of fiscal 2001 was the result of $10.0 million short-term borrowing, net proceeds from the exercise of employee stock options of $0.9 million, off set by the repurchase of 565,000 shares of the Company's common stock at a cost of $10.3 million The Company believes these sources of liquidity, and financing opportunities available to it will be sufficient to meet its projected working capital and other cash requirements for the foreseeable future. However, it is possible that the Company may need to raise additional funds to fund its activities beyond the next year or to consummate acquisitions of other businesses, products, wafer capacity or technologies. The Company could raise such funds by selling some its short-term investments, selling more stock to the public or to selected investors, or by borrowing money. The Company may not be able to obtain additional funds on terms that would be favorable to its shareholders and the Company, or at all. If the Company raises additional funds by issuing additional equity, the ownership percentages of existing shareholders would be reduced. In order to obtain an adequate supply of wafers, especially wafers manufactured using advanced process technologies, the Company has entered into and will continue to consider various possible transactions, including equity investments in or loans to foundries in exchange for guaranteed production capacity, the formation of joint ventures to own and operate foundries, as was the case with Chartered Semiconductor, UMC and the planned investment in Tower (please see "Note 9-Commitments" for details), or the usage of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods. Manufacturing arrangements such as these may require substantial capital investments, which may require the Company to seek additional equity or debt financing. There can be no assurance that such additional financing, if required, will be available when needed or, if available, will be on satisfactory terms. Additionally, the Company has entered into and will continue to enter into various transactions, including the licensing of its integrated circuit designs in exchange for royalties, fees or guarantees of manufacturing capacity. -21- =============================================================================== Part I - Other Information ITEM 1 LEGAL PROCEEDINGS In December 1996, Alliance Semiconductor International Corporation ("ASIC"), a wholly-owned subsidiary of the Company, was served with a complaint filed in Federal Court alleging that ASIC had infringed two patents owned by AMD related to flash memory devices, and seeking injunctive relief and damages. In March 1997, the Company was added as a defendant. In April 1996, the Court allowed AMD to expand its claims to include several new flash products which had been recently announced by the Company. In January and February 2000, both parties filed for motions for summary judgment. Each defendant has denied the allegations of the complaint and asserted a counterclaim for declaration that each of the AMD patents is invalid and not infringed by such defendant. A trial date is currently set for January 2001. In October 2000, the Company and AMD participated in a court ordered mediation and reached a preliminary agreement in principle on terms of a proposed settlement. The impact on the Company cannot me estimated at this time. The Company believes the resolution of this matter will not have a material adverse effect on its financial conditions and its results of operations. In July 1998, the Company learned that a default judgment was entered against the Company in Canada, in the amount of approximately US$170 million, in a case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805 (Victoria Registry). The Company, which had previously not participated in the case, believes that it never was properly served with process in this action, and that the Canadian court lacks jurisdiction over the Company in this matter. In addition to jurisdictional and procedural arguments, the Company also believes it may have grounds to argue that the claims against the Company should be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the court set aside the default judgment against the Company. In April 1999, the plaintiffs were granted leave by the Court to appeal this judgment. Oral arguments were made before the Court of Appeals in June 2000. In July 2000 the Court of Appeals instructed the lower Court to allow the parties to take depositions regarding the issue of service of process, while also setting aside the default judgment against the Company. ITEM 2 OTHER INFORMATION In February 1997, Micron Technology, Inc. filed an antidumping petition with the United States International In February 1997, Micron Technology, Inc. filed an antidumping petition with the United States International Trade Commission ("ITC") and United States Department of Commerce ("DOC"), alleging that SRAMs fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing SRAMs was materially injured or threatened with material injury by reason of imports of SRAMs fabricated in Taiwan. After a final affirmative DOC determination of dumping and a final affirmative ITC determination of injury, DOC issued an antidumping duty order in April 1998. Under that order, the Company's imports into the United States on or after approximately April 16,1998 of SRAMs fabricated in Taiwan are subject to a cash deposit in the amount of 50.15% (the "Antidumping Margin") of the entered value of such SRAMs. (The Company posted a bond in the amount of 59.06% (the preliminary margin) with respect to its importation, between approximately October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the Company and others filed an appeal in the United States Court of International Trade (the "CIT"), challenging the determination by the ITC that imports of Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On June 30, 1999, the CIT issued a decision remanding the ITC's affirmative material injury determination to the ITC for reconsideration. The ITC's remand determination reaffirmed its original determination. The CIT considered the remand determination and remanded it back to the ITC for further reconsideration. On June 12, 2000, in its second remand determination the ITC voted negative on injury, thereby reversing its original determination that Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The second remand determination was transmitted to the CIT on June 26, 2000 for consideration. Micron has appealed the decision of the CIT to the Court of Appeals for the Federal Circuit. The Company cannot predict either the timing or the eventual results of the appeal, although it is expected to take a year or more to conclude. Until a final judgment is entered in the appeal, no final duties will be assessed on the Company's entries of SRAMs from Taiwan covered by the DOC antidumping duty order. If the appeal is successful, the antidumping order will be terminated and cash deposits will be refunded with interest. If the appeal is unsuccessful, the Company's entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 2000 will be liquidated at the deposit rate in effect at the time of entry. On subsequent entries of Taiwan-fabricated SRAMs, the Company will continue to make cash deposits in the amount of 50.15% of the -22- entered value. In April 2001, the Company will have an opportunity to request a review of its sales of Taiwan-fabricated SRAMs from April 1, 2000 through March 31, 2001 (the "Review Period"). If it does so, the amount of antidumping duties, if any, owed on imports from April 2000 through March 2001 will remain undetermined until the conclusion of the review in early 2002. If the DOC found, based upon analysis of the Company's sales during the Review Period, that antidumping duties either should not be imposed or should be imposed at a lower rate than the Antidumping Margin, the difference between the cash deposits made by the Company, and the deposits that would have been made had the lower rate (or no rate, as the case may be) been in effect, would be returned to the Company, plus interest. If, on the other hand, the DOC found that higher margins were appropriate, the Company would have to pay difference between the cash deposits paid by the Company and the deposits that would have been made had the higher rate been in effect. At September 30, 2000, the Company had posted a bond secured by a letter of credit in the amount of approximately $1.7 million and made cash deposits in the amount of $1.7 million relating to the Company's importation of Taiwan-manufactured SRAMs. THE INVESTMENT COMPANY ACT OF 1940 Following a special study after the stock market crash of 1929 and the ensuing Depression, Congress enacted the Investment Company Act of 1940 (the "Act"). The Act was primarily meant to regulate mutual funds, such as the families of funds offered by the Fidelity and Vanguard organizations (to pick two of many), and the smaller number of closed-end investment companies that are traded on the public stock markets. In those cases the funds in question describe themselves as being in the business of investing, reinvesting and trading in securities and generally own relatively diversified portfolios of publicly traded securities that are issued by companies that the investment companies do not control. The fundamental intent of the Act is to protect the interests of public investors from fraud and manipulation by the people who establish and operate such investment companies, which constitute large pools of liquid assets that could be used improperly, or be not properly safeguarded, by the persons in control of them. When the Act was written, its drafters (and Congress) also felt that a company could, either deliberately or inadvertently, come to have the defining characteristics of an investment company without proclaiming that fact or being willing to voluntarily submit itself to regulation as an acknowledged investment company, and that investors in such a company could be just as much in need of protection as are investors in companies that are openly and deliberately established as investment companies. In order to deal with this perceived potential abuse, the Act and rules under it contain provisions and set forth principles that are designed to differentiate "true" operating companies from companies that may be considered to have sufficient investment-company-like characteristics to require regulation by the Act's complex procedural and substantive requirements. These provisions apply to companies that own or hold securities, as well as companies that invest, reinvest and trade in securities, and particularly focus on determining the primary nature of a company's activities, including whether an investing company controls and does business through the entities in which it invests or, instead, holds its securities investments passively and not as part of an operating business. For instance, under what is, for most purposes, the most liberal of the relevant tests, a company may become subject to the Act's registration requirements if it either holds more than 45% of its assets in, or derives more than 45% of its income from, investments in companies that the investor does not primarily control or through which it does not actively do business. In making these determinations the Act generally requires that a company's assets be valued on a current fair market value basis, determined on the basis of securities' public trading price or, in the case of illiquid securities and other assets, in good faith by the company's board of directors. The Company viewed its investments in Chartered, USC and USIC as operating investments primarily intended to secure adequate wafer manufacturing capacity; as previously noted, the Company's access to the manufacturing resources that it obtained in conjunction with those investments will decrease if the Company ceases to own at least 50% of its original investments in the enterprises, as modified, in the cases of USC and USIC, by their merger into UMC. In addition, the Company believes that, before USC's merger into UMC, the Company's investment in USC constituted a joint venture interest that the staff of the Securities and Exchange Commission (the "SEC") would not regard as a security for purposes of determining the proportion of the Company's assets that might be viewed as having been held in passive investment securities. However, because of the success during the last year of the Company's investments, including its strategic wafer manufacturing investments, at least from the time of the completion of the merger of USC and USIC into UMC in January 2000 the Company believes that it could be viewed as holding a much larger portion of its assets in investment securities than is presumptively permitted by the Act for a company that is not registered under it. -23- On the other hand, the Company also believes that the investments that it currently holds in Chartered and UMC, even though in companies that the Company does not control, should be regarded as strategic deployments of Company assets for the purpose of furthering the Company's memory chip business, rather than as the kind of financial investments that generally are considered to constitute investment securities. Applying certain other tests that the SEC utilizes in determining investment company status, the Company has never held itself out as an investment company; its historical development has focused almost exclusively on the memory chip business; the activities of its officers and employees have been overwhelmingly addressed to achieving success in the memory chip business; and until the past year, its income (and losses) have derived almost exclusively from the memory chip business. Accordingly, the Company believes that it should be regarded as being primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities, and has applied to the SEC for an order under section 3(b)(2) of the Act confirming its non-investment-company status. However, if the Company's investments in Chartered and UMC are now viewed as investment securities, it must be conceded that an unusually large proportion of the Company's assets could be viewed as invested in assets that would, under most circumstances, give rise to investment company status. Therefore, while the Company believes that it has meritorious arguments as to why it should not be considered an investment company and should not be subject to regulation under the Act, there can be no assurance that the SEC will agree. And even if the SEC grants some kind of exemption from investment company status to the Company, it may place significant restrictions on the amount and type of investments the Company is allowed to hold, which might force the Company to divest itself of many of its current investments. Significant potential penalties may be imposed upon a company that should be registered under the Act but is not, and the Company intends to proceed expeditiously to resolve its status. If the Company does not receive an exemption from the SEC, the Company would be required to register under the Act as a closed-end management investment company. In the absence of exemptions granted by the SEC (if it determines to do so in its discretion after an assessment of the public interest), the Act imposes a number of significant requirements and restrictions upon registered investment companies that do not normally apply to operating companies. These would include, but not be limited to, a requirement that at least 40% of the Company's board of directors not be "interested persons" of the Company as defined in the Act and that those directors be granted certain special rights with respect to the approval of certain kinds of transactions (particularly those that pose a possibility of giving rise to conflicts of interest); prohibitions on the grant of stock options that would be outstanding for more than 120 days and upon the use of stock for compensation (which could be highly detrimental to the Company in view of the competitive circumstances in which it seeks to attract and retain qualified employees); and broad prohibitions on affiliate transactions, such as the compensation arrangements applicable to the management of Alliance Venture Management, many kinds of incentive compensation arrangements for management employees and joint investment by persons who control the Company in entities in which the Company is also investing (which could require the Company to abandon or significantly restructure its management arrangements, particularly with respect to its investment activities). While the Company could apply for individual exemptions from these restrictions, there could be no guarantee that such exemptions would be granted, or granted on terms that the Company would deem practical. Additionally, the Company would be required to report its financial results in a different form from that currently used by the Company, which would have the effect of turning the Company's Statement of Operations "upside down" by requiring that the Company report its investment income and the results of its investment activities, instead of its operations, as its primary sources of revenue. While the Company is working diligently to deal with these investment company issues, there can be no assurance that a manageable solution will be found. The SEC may be hesitant to grant an exemption from investment company status in the Company's situation, and it may not be feasible for the Company to operate in its present manner as a registered investment company. As a result, the Company might be required to divest itself of assets that it considers strategically necessary for the conduct of its operations, to reorganize as two or more separate companies, or both. Such divestitures or reorganizations could have a material adverse effect upon the Company's business and results of operations. -24- ITEM 3 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An annual meeting of the stockholders of the Company was held on September 8, 2000. Company's stockholders elected the Board's nominees as directors by the votes indicated:
NOMINEE VOTES FOR VOTES WITHHELD ------------------ -------------- ---------------- N. Damodar Reddy 35,900,700 4,157,163 C. N. Reddy 38,074,736 1,983,127 Jon B. Minnis 38,139,406 1,918,457 Stanford L. Kane 38,130,827 1,927,036
The proposal to amend the Company's 1992 Stock Plan to increase the number of shares of common stock reserved for issuance by 2,000,000 shares, from 11,000,000 to 13,000,000 shares, was ratified with 33,279,626 votes in favor, 6,731,393 against and 46,844 abstentions. The selection of PricewaterhouseCoopers LLP as the Company's independent auditors was ratified with 39,547,907 votes in favor, 485,777 against and 24,179 abstentions. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits:
Exhibit Document Description Number ------------ ------------------------------------------------ 27.01 Financial Data Schedule (filed only with the electronic submission of Form 10-Q in accordance with the EDGAR requirements)
(b) No reports on Form 8-K were filed during quarter ended September 30, 2000. -25- ================================================================================ SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLIANCE SEMICONDUCTOR CORPORATION November 14, 2000 By: /S/ N. DAMODAR REDDY ------------------------------------- N. Damodar Reddy Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) November 14, 2000 By: /S/ DAVID EICHLER ------------------------------------- David Eichler Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) -26- EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 Alliance Semiconductor Corporation Financial Data Schedule 0000913293 Alliance Semiconductor 1000 US Dollars 6-MOS MAR-31-2001 APR-2-1999 SEP-30-2000 1 17,494 584,299 34,980 1,272 77,752 720,551 29,166 18,501 1,299,782 274,446 0 0 0 426 830,621 1,299,782 64,466 64,466 39,943 39,943 8,727 0 99 29,614 12,053 17,561 0 0 (1,093) 16,468 0.40 0.39
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